Downsizing Makes Up Large Chunk Of Houston’s Q2 2023 Office Leasing Activity

Leasing in Houston’s office market was up significantly in the second quarter, but much of that came from reshuffling the deck as companies relocated and downsized, according to a new report from Savills.

The Houston office market saw more than 3.3M SF of leasing activity in Q2, which is up 35% quarter-over-quarter and up 85% year-over-year, Savills’ report shows. However, the three largest leases, comprising about 25% of the quarter’s leasing activity, all came from companies relocating and notably downsizing.

LyondellBasell’s relocation from its namesake LyondellBasell Tower downtown to the Galleria area’s Williams Tower represents the market’s largest office lease of the year so far at about 319K SF. This is an 11% reduction compared to its previous lease, according to the Savills report.

Fluor Corp. had the second-largest lease of the quarter with 308K SF at Three Eldridge in the Energy Corridor. This marks a 71% reduction from the 1.2M SF offices it built in Sugar Land in 1984. Though the campus was built to accommodate 5,000 people, it never reached full capacity, and Fluor no longer owns it, the Houston Chronicle reported.

Fluor plans to leave the campus by June 2024. The company is following the rightsizing trend consistently seen across the office market, according to statements Jennifer Kim, vice president and general manager of Fluor’s Houston office, made to the Houston Chronicle.

“It's not about moving from Sugar Land; it's really about optimizing our footprint. And this is something we've been looking at globally — understanding today's workforce, in terms of anticipated workload and growth in the organization, as well as this flexible workplace that has evolved over the past several years,” she told the paper.

The third-largest lease of 172K SF came from Technip Energies relocating its U.S. headquarters within the Energy Corridor from 15011 Katy Freeway to Energy Tower II at 11720 Katy Freeway. The move represented a 54% reduction in space, according to the Savills report.

The top 10 largest leases in Q2 2023 comprised more than 40% of total leasing activity, Savills said. Of those, eight were relocations.

Even so, the report noted some evidence of office recovery. This quarter marked the third time since Q3 2020, the quarter following the onset of the pandemic, that leasing activity exceeded the five-year quarterly average.

Rents are on the upswing, with the average asking rental rate bumping up 6% year-over-year to $31.07. For Class-A office space, the asking rental rate increased 8% year-over-year to $36.04 per SF.

The availability rate also decreased year-over-year, from 30.2% to 28.2%, the report shows. However, looking ahead, Savills said availability is likely to increase as companies relocate and excess space comes to market. 

The report also projects more office property loan distress this year as rising interest rates leave many owners underwater.